Murray: Sometimes foreclosure is homeowner's best bet

Can't make your house payments or can do so only by sacrificing everything else? Should you keep paying or should you walk away and let the bank take your home?

The deep contraction in the economy and in the housing market has created devastating consequences for homeowners throughout the country. Home values have fallen and those regularly making their mortgage payments often find themselves unable to refinance at lower interest rates because their loan-to-value ratios are too low. Many have lost their jobs or had their hours cut back and are now struggling to stay current on their mortgage payments. Many find themselves in foreclosure.

As a realtor, I regularly receive desperate telephone calls and visits from homeowners having a difficult time meeting their payments. They don't know where to turn or what to do. I've been told, "My bank won't talk to me about loan modification until I have missed three payments." People do not want to lose their homes yet the very institutions that could help them often have not. In my opinion you have three, and possibly more, choices depending on your specific circumstances.

Choice No. 1 - Two weeks ago, the federal government put in place guidelines to help those in trouble with their home loans. You may access this information online at www.hopenow.com or by calling 1-888-995-HOPE. On the Web site you can find a link to your mortgage institution that sets out the steps you must take to receive help. Be warned that this program is only for homeowners on their primary residence. Under the right conditions the federal government is paying banks to help you keep your home. Be advised that the process can take some time. It can also be undertaken if you are in bankruptcy. At this juncture, it is too early to see if the plan really works, but it does offer hope.

Choice No. 2 - If you can afford the payment, stay where you are even if your mortgage is more than current value. The market will ultimately come back.

Choice No. 3 - Some clients I speak with are essentially going broke making house payments on property that their current income won't support, trying to protect their credit rating. They don't want to file for bankruptcy and think a short sale will keep their credit in good shape. Actually, there is no difference between a short sale and bankruptcy when it comes to your credit report.

One possibility available to those who are sacrificing everything to keep current on their mortgage payments: Stop! Save everything else and go ahead and lose your house. Ultimately you may lose it anyway. If you just quit making payments and save the money, while paying other bills, you will have more than enough money for first and last month's rent plus a security deposit. You will also avoid a lot of stress. Typically it takes more than six months for a bank to foreclose. If you're not making payments, that amounts to a sizeable amount of cash.

I realize trying to do the right thing and honoring your commitment to your mortgage lender is the moral high ground. Unfortunately, too often this moral high ground comes at the expense of a broken marriage or stress-related health problems. Probably not a good tradeoff.

What happens if you lose a home due to short sale or foreclosure? In all likelihood you won't be able to get a conventional loan for four years, an FHA loan for three years and a VA loan for two years. You can still buy a home via lease option, use seller financing or have a co-signer during that period.

One consideration many face when they lose a home is the possible tax consequences. Under IRS guidelines "debt relief" is treated as income. If you purchased a home with a $100,000 mortgage, the market went up, you refinanced based on your appreciated value at $150,000 and then you lose the home, the IRS says you just made money via debt relief and they will tax you on the income. (This does not apply to those who did not refinance.) The only way to avoid this increase in taxable income is to either file bankruptcy or declare insolvency. Insolvency isn't so bad but you need to get a good CPA to help with the paperwork.

Whatever else you do, never pay for a "foreclosure rescue specialist." They are scam artists. HUD-approved housing counselors are available for free and they are local. If anyone other than your bank tells you they can save your home if you sign it over to them, it is a lie.

There are legitimate choices. Inform yourself, seek help and keep it all in perspective. Your home is not your life, spouse, kids or health. You can replace it later.

Record Searchlight contributing columnist Ken Murray can be reached at kenm@shasta.com.